G.R. No. L-36821 - Dizon vs. Gaborro

Case Summary (G.R. No. L-36821)

Key Dates and Documentary Milestones

Foreclosure sale of the first mortgage to DBP: May 26, 1959 (DBP purchased the properties). Deeds executed between Dizon and Gaborro: October 6, 1959 (Deed of Sale with Assumption of Mortgage; Option to Purchase Real Estate; Assignment of Right of Redemption executed January 7, 1960). Conditional sale between DBP and Gaborro: July 11, 1960. Complaint filed by Dizon: July 30, 1962. Trial court judgment: March 14, 1970. Court of Appeals decision: affirmed with modification (date of CA judgment not specified in prompt). Petition for review to the Supreme Court; decision rendered in 1978.

Procedural Posture and Reliefs Sought

Petitioner Dizon sued to have the two instruments reformed to reflect that they constituted an equitable mortgage or security arrangement (not an absolute sale), asked that Gaborro be ordered to accept reimbursement and reconvey the lands, requested an accounting of fruits and incomes and damages, and sought reconveyance upon reimbursement. DBP denied plaintiff’s ownership claims (DBP asserted it bought the properties at foreclosure and that Dizon’s remedy was redemption under Act 3135). The trial court reformed the instruments to reflect a reimbursement arrangement; the Court of Appeals affirmed with modification granting Dizon a right to reimburse P131,831.91 plus 8% interest from October 6, 1959, exercisable within one year; the present appeal followed.

Undisputed Facts Established at Trial

Dizon was original owner of three parcels (aggregate 130.58 hectares) covered by TCT No. 15679. He mortgaged the properties: first mortgage to DBP (original loan P38,000) and second mortgage to PNB (P93,831.91). DBP foreclosed extrajudicially and purchased at sale on May 26, 1959. Despite foreclosure, Dizon retained the statutory right to redeem within one year. On October 6, 1959 Dizon and Gaborro signed the Deed of Sale with Assumption of Mortgage and an Option to Purchase; the stated consideration P131,831.91 was not actually paid in cash by Gaborro. Gaborro took possession, paid sums to DBP and PNB, cultivated the land, made improvements, and appropriated produce; taxes were paid by Gaborro. Dizon later offered to reimburse but tendered no cash; when Gaborro refused, Dizon sued.

Governing Legal Framework on Foreclosure and Redemption

Act No. 3135 (as amended by Act 4118) governs extrajudicial foreclosure and sale under the special power; it preserves the mortgagor’s right of redemption for one year from sale. Under prevailing jurisprudence, a purchaser at foreclosure sale acquires only an inchoate title subject to the owner’s redemption within the redemption period; meanwhile the judgment debtor (owner) entitled to possession during redemption may retain fruits and possession. A right of redemption is a property right that can be assigned.

Court’s Characterization of the True Nature of the Transaction

The Supreme Court agreed with the trial and appellate courts that, in light of the foreclosure context, the absence of actual cash consideration, and the subsequent conduct of the parties, the real agreement was that Gaborro would assume and pay Dizon’s indebtedness to the banks and in consideration would be granted possession, enjoyment and use of the lands until Dizon reimbursed Gaborro for amounts actually paid. The Court ruled the instruments did not effect an absolute sale of full title because (1) no cash consideration was actually paid by Gaborro despite the deed’s recital, and (2) Dizon’s full ownership had already been divested by the prior foreclosure sale to DBP so he could legally transfer only his remaining rights (not absolute title).

Reformation, Innominate Contract and Antichresis Characterization

The Court treated the parties’ agreement as an innominate contract under Article 1307 of the Civil Code — a contract to give and to do — that, between Dizon and Gaborro, had features akin to antichresis: Gaborro assumed payment of bank debts, possessed and made the lands productive, and Dizon retained the right to recover upon reimbursement. The instruments were found to have been mistaken in form relative to the parties’ true intention; under Articles 1359 and 1361 (reformation for mistake), the deeds were to be reformed to reflect the actual agreement.

Remedies Ordered: Reconveyance Right and Conditions for Exercise

The Court affirmed reformation and granted Dizon a right to reconveyance upon reimbursement, but clarified the scope and limits: Dizon may reacquire the properties within one year from finality of the Supreme Court decision by reimbursing Gaborro (or his estate) whatever amount Gaborro actually paid on account of the principal portions of Dizon’s loans with DBP and PNB, based on duly certified bank statements. The Court excluded reimbursement for interests and land taxes paid by Gaborro; likewise, any outstanding principal balances owed to the banks shall be deducted from the reconveyance price so that Dizon may directly settle with the banks as needed. The total maximum reconveyance obligation of Dizon was fixed at P131,831.91 (the aggregate principal amounts), and if bank claims exceeded that sum due to interests/charges, nothing further is payable to Gaborro and Dizon steps into Gaborro’s position to settle with the banks and may pursue recovery against Gaborro for any sums he paid in excess.

Accounting for Fruits and Income — Court’s Rationale and Ruling

The Court denied Dizon’s claim for an accounting of fruits, harvests and other income received by Gaborro from October 6, 1959 onward. The rationale: in fairness and equity, becaus

Case Syllabus (G.R. No. L-36821)

Citation and Procedural Posture

Reported at 173 Phil. 102; 74 OG 7244 (September, 1978). First Division, G.R. No. L-36821. Decision promulgated June 22, 1978. Opinion by Justice Guerrero, J.
Petition for review on certiorari seeks review of the Court of Appeals decision in CA-G.R. No. 46976-R (Jose P. Dizon v. Alfredo G. Gaborro (substituted by Pacita de Guzman Gaborro as Judicial Administratrix of the Estate of Alfredo G. Gaborro) and the Development Bank of the Philippines, defendants-appellees), which affirmed with modification the decision of the Court of First Instance of Pampanga in Civil Case No. 2184.
Dispositive portion of the Court of Appeals decision (as quoted in record) granted plaintiff-appellant the right to refund/reimburse defendants the sum of P131,831.91 with interest at 8% per annum from October 6, 1959 until full payment, exercisable within one year from the date the judgment becomes final, failing which he would lose his rights over the lands; costs against the appellant. The Supreme Court reviewed that disposition.

Core Legal Issue(s)

Whether the "Deed of Sale with Assumption of Mortgage" and the "Option to Purchase Real Estate," both executed on October 6, 1959 between Jose P. Dizon (petitioner) and Alfredo G. Gaborro (respondent), constitute:
- An absolute sale and conveyance of the three parcels of land described therein; or
- Merely an equitable mortgage or conveyance by way of security (antichresis-like innominate contract) securing reimbursement/refund/repayment by Dizon to Gaborro of sums paid by Gaborro to the Development Bank of the Philippines (DBP) and the Philippine National Bank (PNB).
Supplementary issue: whether Gaborro (or his administratrix estate) must account for fruits, produce and income derived from the lands and whether reconveyance should be ordered.

Undisputed Antecedent Facts (as established in record)

Petitioner Jose P. Dizon was the registered owner of three parcels of agricultural land in Mabalacat, Pampanga (aggregate 130.58 hectares) evidenced by Transfer Certificate of Title No. 15679.
Dizon granted a first mortgage to the Development Bank of the Philippines (DBP, formerly Rehabilitation Finance Corporation) to secure a loan of P38,000.00, and a second mortgage to the Philippine National Bank (PNB) to secure P93,831.91.
Dizon defaulted. The DBP extrajudicially foreclosed the first mortgage under Act No. 3135. Foreclosure sale occurred on May 26, 1959; lands were sold to DBP for P31,459.21 and a Certificate of Sale was executed in favor of DBP (Exh. A-2, Exh. I-b).
On November 12, 1959 Dizon himself executed a deed of sale to DBP recorded October 6, 1960; TCT No. 15679 was cancelled and TCT No. 24292 was issued in the name of DBP on or before October 6, 1960.
Prior to or about October 6, 1959 Dizon and Gaborro met; Gaborro took possession of the lands after the parties executed instruments on October 6, 1959; Gaborro thereafter cultivated and improved the lands, raised crops and paid land taxes; Gaborro made several payments to DBP and PNB (amounts and receipts to be shown later).
Dizon retained a statutory right of redemption following the extrajudicial foreclosure and sale under Act 3135 for the one-year redemption period.

Instruments Executed October 6, 1959 — Deed of Sale with Assumption of Mortgage (Exhibit A / Exhibit A‑Stipulation)

Captioned "DEED OF SALE WITH ASSUMPTION OF MORTGAGE," executed October 6, 1959 by JOSE P. DIZON (VENDOR) and ALFREDO G. GABORRO (VENDEE).
Describes the three parcels (Lot Nos. 188, 193, 568 of Cadastral Survey of Mabalacat) with their respective areas (221,172; 978,717; 105,921 square meters) and boundaries, and states they were mortgaged (first to DBP for P38,000; second to PNB for P93,831.91).
Recites sale price/consideration of P131,831.91 and contains language: "in hand paid in cash by the VENDEE unto the VENDOR, receipt whereof is hereby acknowledged by the VENDOR to his entire and full satisfaction," and further states the vendor "does by these presents, sell, transfer and convey ... by way of absolute sale, perpetually and forever, unto the VENDEE ... free from all liens and encumbrances of whatever nature, except the pre-existing mortgage obligations..."
Contains assumption language: VENDEE "assume as he has assumed ... the mortgage indebtedness ... as if the aforesaid documents were personally executed by the VENDEE," making the mortgage documents parts thereof by reference.
The record establishes, however, that the recited sum of P131,831.91 was not actually paid by Gaborro to Dizon; instead, that sum represented the aggregate principal amounts of Dizon's indebtedness to DBP and PNB.

Instruments Executed October 6, 1959 — Option to Purchase Real Estate (Exhibit B / Exhibit B‑Stipulation)

Captioned "OPTION TO PURCHASE REAL ESTATE," executed the same day by Alfredo G. Gaborro in favor of Jose P. Dizon (giving Dizon an option to repurchase).
Describes same three parcels (TCT No. 15679) and states they were acquired by Gaborro "by purchase by virtue of that document entitled Deed of Sale with Assumption of Mortgage dated October 6, 1959" (acknowledgment before Notary Gregorio Sumbi\o).
Grants option valid and effective within a specific period and upon payment of P131,831.91 plus 8% per annum interest; the option text in the record contains two differing period statements in different parts of the record:
- In the Option instrument as transcribed: "Said option shall be valid and effective within the period comprised from January, 1965 to December 31, J 970, inclusive, upon payment of the amount of P131,831.91 plus an interest of eight per centum (8%) thereof, per annum."
- Later in the opinion, the Court quotes or refers to the Option as on its face granting Dizon the option to purchase the properties "which must be exercised within the period from January, 1960 to December 31, 1965." (Source contains both formulations; the record therefore reflects an inconsistency in the stated option period.)
The Option provides that partial payments may be applied without disturbing possession/ownership and grants Dizon a right of first preference if he finds a purchaser before the option expiry, subject to refunding the aggregate amount paid to DBP and PNB plus interest at 8%.

Letter to DBP, Board Resolution and Conditional Sale between DBP and Gaborro

On October 7, 1959 Gaborro wrote DBP advising that, pursuant to the Deed of Sale with Assumption of Mortgage dated October 6, 1959, ownership was transferred to him subject to DBP's conformity to the assumption, that he proposed to pay DBP under same terms and requested to pay in ten equal annual amortizations, and enclosed a check for P3,609.95 representing 10% of the indebtedness to demonstrate good faith (Exh. J).
DBP Board Resolution No. 7066 dated October 21, 1959 approved Gaborro's offer but required 20% initial payment (Exh. D).
DBP and Gaborro executed a conditional sale dated July 11, 1960 in consideration of P36,090.95 (Exh. C) payable 20% down and the balance in ten annual amortizations at 8% per annum.

Assignment of Right of Redemption and Assumption of Obligation (Exhibit G / Exh. 9)

Dated January 7, 1960, JOSE P. DIZON assigned his right of redemption to ALFREDO G. GABORRO by an instrument entitled "ASSIGNMENT OF RIGHT OF REDEMPTION AND ASSUMPTION OF OBLIGATION."
The assignment recites Dizon's statutory right to redeem per Act 3135 within one year from foreclosure and assigns that right to Gaborro; Dizon "relinquishes any and all rights to the said properties" and Gaborro "assumes the obligation in favor of the said Development Bank of the Philippines ... as paying whatever legal indebtedness the Assignor has with the said Bank ... and further recognizes the second mortgage in favor of the Philippine National Bank."
The assignment contains acknowledgment omissions in the printed record.

Possession, Expenditures, Cultivation, Taxes, and Payments

After executing the October 6, 1959 instruments and the conditional sale with DBP, Gaborro took actual possession, cultivated the land, introduced improvements, raised sugarcane and other crops, appropriated the produce to himself, and paid land taxes.
Gaborro made several payments to DBP and to PNB; the exact amounts were admitted as to existence and to be shown later with receipts.
Dizon, through counsel, on July 5, 1961 formally offered to reimburse Gaborro for what Gaborro had paid the banks but did not tender cash; Dizon demanded an accounting; Gaborro refused.

Complaint, Issues Joined, and Stipulation of Facts

On July 30, 1962 Dizon filed suit in the Court of First Instance of Pampanga asserting that the October 6, 1959 instruments did not express the real agreement: that the deeds constituted an equitable mortgage / security arrangement (antichresis-like) rather than an absolute sale; he prayed for acceptance of his offer to reimburse, surrender of possession, accounting of fruits/produce/income, and damag